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Testimony of Sonny Perdue on the state of the American agricultural economy

Testimony of Secretary Sonny Perdue U.S. Department of Agriculture before the United States House Committee on Agriculture May 17, 2017

May 22, 2017

It's been four months since President Donald Trump took office. Four months during which the new resident of the White House multiplied decrees, namely some “thirty executive orders”, some for the least controversial: the repeal of “Obamacare”, the anti-abortion decree, the wall with Mexico, the migratory decree, “America first” ...

During his campaign, Donald Trump was the candidate for farmers. While the current Farm Bill is due to expire in 2018, discussions on the next farm framework law are under way. The new Agriculture Secretary, Sonny Perdue, delivered his first speech to the agriculture committee of the House of Representatives on 17th May.

In the excerpt from this speech on the state of agriculture1, he looks at the recent 50% drop in farmers' incomes compared to 2013, due to the slowdown in the overall economy, to the fall in the prices of agricultural produce but also to an increase in production costs.

Farmers are increasingly “exposed to financial risks”, among these risks, is the loss of the value of agricultural land in certain agricultural regions, which, with interest rates rising since 2014, puts a lot of pressure on farmers.

According to S. Perdue, however, these factors are not such as to call into question the main countercyclical programs (Price Loss Coverage and Agriculture Risk Coverage) set up for grain producers reinforced during the last Farm Bill. On the other hand, he is not in favour of the program supposed to support dairy farmers’ margins, the Margin Protection Program for Dairy (MPP-Dairy): the reason - the formula for calculating the triggering of aid, which is not considered suitable.

Another failure, the Stacked Income Protection Plan (STAX) for cotton, whose penetration rate does not exceed 30% and is criticized for the low level of support it provides producers.

At the institutional level, S. Perdue announced the rapprochement of different agencies (Farm Service Agency, Risk Management Agency and the Natural Resources Conservation Service) with the objective of establishing a one-stop shop for farmers.

Finally, on the commercial level, the grievances against China’s and Canada’s agricultural policies were evoked. An undersecretary for foreign trade and foreign affairs will coordinate the USDA's actions to “open new markets and protect current ones”.

Momagri Editorial Board

You asked me to provide an update today on the state of our agricultural economy. While I believe the farm safety net is working, we are seeing and hearing from producers that they believe it needs updates to meet the needs of the farm economy. Over the past three years, a strong dollar, generally weak global economic growth, and ample global production have combined to lower trade demand from the United States and to depress many commodity prices. As a result, we have seen a 50 percent drop in net farm income from the all-time record highs farmers experienced in 2013. This has squeezed some of our farmers and others who also contribute to the ag economy, and we are seeing it across the countryside in a broad range of areas from input dealers to food manufacturers.

According to our USDA economists, net farm income this year accounting for inflation will be the lowest since 2002. Of course farming is a cyclical business, and previous good times have helped some producers weather the current downturn in agricultural commodity prices and income. However, without the record levels of crop and livestock production we have seen over the past few years, farms would be in a much worse situation today. And we know that we can’t always count on a bumper crop to pay off loans and to buy inputs for next season. Looking at the flood, fire, and snow conditions we’ve already seen this spring reminds us of that.

It is clear that more and more producers are increasingly exposed to financial risk: bank credit is tightening, delinquency rates on both commercial and FSA loans, while still at relatively low levels, have been trending upwards since 2014, and land values are falling in many agricultural regions. All are contributing to increased uncertainty and concern in rural America. As you could expect, those producers with high costs of production, who rent a significant portion of their land base, or who have increased borrowing to cover operating costs have been most at risk as returns decline with commodity prices. About one-in-five cotton, wheat, hog, and poultry farms have a debt-to-asset ratio of more than 40 percent and more than one-in-three of our youngest farmers are in a highly leveraged position.

Nevertheless, even as falling global commodity prices continue to depress farm income, the current farm safety net that was created during the last Farm Bill is providing support for producers. Roughly 1.8 million farms are enrolled in the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs, which are helping cushion the downturn in some commodity prices. To date, the ARC and PLC programs have provided $5.3 billion in financial assistance for crop year 2014 to 1 million farms and $7.8 billion to 1.7 million farms for crop
year 2015, which was paid out to producers last fall. Overall, in calendar year 2016, government farm payments totaled about $13.0 billion in 2016 and are expected to total $12.5 billion in 2017. On top of that, the crop insurance program offset roughly $6.3 billion in farm losses in crop year 2015 and is expected to cover $3.6 billion in 2016.

Yet, not all programs are functioning as producers hoped they would. For example, over 25,000 U.S. dairy farms—more than half– have enrolled in the Margin Protection Program for Dairy (MPP-Dairy), which provides payments if the margin between milk prices and feed costs falls below the coverage level selected by the producer. While many dairy producers saw milk prices fall below their overall costs of production, the margin between dairy prices and feed costs remained for the most part above the levels supported by the program. Many producers said the feed ration used in the MPP program was not representative of the rations they fed their cows. As a result, most dairy producers have been paying to participate in this program meant to insure them against tightening margins without realizing any benefits though their own margins were being squeezed. This is a critical issue for our dairy producers.

As another example, cotton was taken out of the Title I commodity programs. Cotton producers were allowed to participate in the ARC or PLC program on their base acres only by growing another crop. For cotton plantings, producers were allowed to participate in a new crop insurance program called the Stacked Income Protection Plan for Producers of Upland Cotton (STAX). While about 95 percent of cotton acres are enrolled in other types of crop insurance policies each year, only 25-30 percent of cotton acres have been covered by STAX since it began in 2015. Many cotton producers have found faults in STAX and assert it is not as beneficial as the assistance provided to other crops. Both the dairy and cotton examples are the types of issues that producers hope will be addressed in the next Farm Bill.

As I mentioned, access to credit remains a significant issue for producers, particularly as working capital on farm businesses has fallen nearly seventy percent since 2012. Demand for credit continues to be strong, particularly for farm operating loans, as farmers cope with lower commodity prices. As commercial channels become more difficult for producers, we anticipate that demand for USDA credit assistance will continue to remain high. Since 2009, USDA has provided approximately 243,000 loans totaling over $35.2 billion to farmers and ranchers. The recent increase in demand led to full utilization of the program level for farm operating loans for fiscal year (FY) 2016, with record loan levels at $6.3 billion. So far in 2017, we’ve seen a slight decline of 6 percent in loan numbers and value over the same period in 2016, but that is a small decline coming off a record year—demand for FSA financing is still strong.

Looking forward to the next farm bill, I hope we can work closely with you to identify ways to make USDA programs work better for America’s farmers and ranchers. However, we have to be sure to make those programs work as a safety net that helps farmers in tough times. We don’t want to see programs that encourage production choices simply to increase government payments to the farm; rather we want our producers to be responding to the market when they are deciding on what to plant for the coming year. In addition, I believe it is imperative to improve the tools the Department has to address pressing and difficult situations faced by our producers, and to react quickly and provide additional assistance if current market conditions persist or worsen. The authority of the Secretary has been limited by congressional action when it comes to using CCC funding, Section 32, and other authorities to provide relief, while at the same time our farmers, ranchers, and constituents are asking USDA to help. I’m not suggesting that USDA would take action in every instance where a commodity sector or group of producers is hurting - we certainly must be mindful of fiscal challenges - but it would be helpful for the Secretary to have authority to evaluate the needs of U.S. agriculture and use these tools when appropriate. As another example, while not in this Committee’s jurisdiction, USDA’s annual appropriations is so prescriptive that it is rivaled only by the Department of Defense. For instance, I recently learned that there is language in our appropriations act that requires the Farm Service Agency to notify Congress of relocating any county based employee if the relocation would result in an office that has two or fewer employees. So even if an employee in an office of three wants to leave for a voluntary promotion, the agency could not relocate that person until Congress is notified. This kind of limiting language is what challenges USDA’s ability to be a more nimble and effective organization.